Frenzied bidding wars push Toronto homebuyers to skip inspections

A realtor’s sign is placed on the front yard of a home for sale in Toronto, Mar 20 2017. (Fred Lum/The Globe and Mail)

In Toronto, some homebuyers are so desperate to win bidding wars that they’re rushing to make offers without even getting an inspection.

The average price for a detached home in Canada’s largest metropolitan area jumped to$1.21-million in February, up a third from a year earlier, amid a dearth of properties for sale. In the same period, Toronto-based home-inspection firm Carson Dunlop saw a 34 per cent drop in volume. Murray Parish, president of the Ontario Association of Home Inspectors, said he’s seen a 30 per cent decline at his firm, Parish Home Inspections.

“The bottom line is we are in a shortage of supply,” said Tasis Giannoukakis, a Century 21 Leading Edge Realty Inc. broker based in Toronto, adding that it’s not uncommon to see bids of as much as $200,000 over the asking price. “That pressure is what’s causing everybody to remove the conditions on an inspection.”

Home-price increases in North America’s fourth-largest city and its suburbs have outpaced growth in places including Manhattan, Vancouver, Seattle and San Francisco, leading local officials to search for ways to control price gains and spurring concerns a correction may be coming. The frothy market, buoyed by low interest rates, is resulting in frenzied bidding wars, causing many shoppers to leave once-standard clauses such as a professional home inspection and financing contingencies out of their purchase offers.

DIY Homebuyers

Giannoukakis noted that homebuyers are generally savvier when it comes to repairs and renovations than they were a decade or two ago, thanks to information on the internet and the popularity of home-related TV shows. Still, removing conditions such an inspection aren’t due to voluntary risk-taking, but are “100 per cent” a byproduct of multiple offers on the same property, he said.

“When you are the only offer on the table, you can submit a conditional offer,” said Lorand Sebestyen, an agent with iPro Realty Ltd. in Toronto, adding that he counsels clients on the risks of skipping an inspection. “But when competing with several other offers, you don’t have that luxury.”

Even for do-it-yourself types, the potential pitfalls are myriad – especially if a buyer is already going over budget to complete a purchase. Alan Carson, founder of home-inspection firm Carson Dunlop, said problems his team has found over the years include faulty pipes, eroding foundations, termite infestations, old roofs and a bathroom that seemed functional but actually lacked any connected plumbing. Other surprises have included finding a loaded rifle and large bag of jewellery in an attic, as well as a “very sooty raccoon” jumping from a fireplace damper, he said.

“You don’t know what could be hiding behind the walls,” said Shubha Dasgupta, owner of Capital Lending Centre, a Toronto-based mortgage brokerage.

The average home-inspection fee is around $450 these days, according to Carson.

San Francisco

A move away from inspections isn’t unique to Toronto. Vancouver, Canada’s hottest real estate market until Toronto took that mantle last year, saw a surge in unconditional purchase offers in the first half of 2016, said Adil Dinani, an agent with Royal LePage West Real Estate Services in the West Coast city.

The same is true in hot U.S. markets. Mark Attarha, president of Bay Sotheby’s International Realty, which has seven offices in the in San Francisco Bay area, said he’s seeing a spate of offers without contingencies, along with a raft of “overbidding.” Attarha estimates that 75 per cent of prospective buyers he works with are accepting a home-inspection report from the seller rather than ordering their own or including an inspection clause in their purchase offers.

“I don’t think the trend is people don’t want to do inspections anymore – it’s somewhat being forced on them in order to compete,” Giannoukakis said. But, he added, if someone is buying a property in the million-dollar range – something far more common after the steep increase in home prices – then a few thousand dollars of potential repairs may be of little concern.

New Homes

There are other instances where buyers can sometimes skip the inspection without feeling like they’re taking too big a gamble. With newer homes, an argument can be made doing so is fine because municipalities ensure properties are built to code, said Dasgupta, the Toronto mortgage broker. Inspections are also less of a concern for condominiums, which are “well-protected and insulated from some of the potential damages that may occur in detached properties,” he said.

The financial burden typically falls to the buyer who opts to skip an inspection. Because the buyer “supposedly has the ability to see problems and ability to negotiate either a lower price or for work to be done, the law doesn’t see any reason really to protect you,” said Michael Lamb, a real estate lawyer and professor at the University of Western Ontario.

Marcus Simon, a property attorney based outside Washington, D.C., said the last time he saw a marked increase in waived inspections in his region was around 2007, just before the full financial crisis hit. Recently, the trend has popped up again in some Washington suburbs, he said.

Speculation Sign

Removing the inspection clause is a sign that “speculation has entered the market,” said Simon, owner of Ekko Title in McLean, Virginia. Some buyers believe property values are appreciating so quickly they can’t lose.

“People think they know the worst-case scenario, but their imagination doesn’t always serve them well,” he said. “They don’t realize how bad or how expensive it can get.”

There is one group that doesn’t see much of a problem with the decline in home inspections: mortgage providers. Banks are far less concerned about costly repairs that may arise later and are instead focused on the appraised value of a property, Dasgupta said.

“The home inspection is really more for consumer protection,” he said. “From a home value standpoint, the appraisal is really the key indicator for the bank. Lenders aren’t liable from the perspective of any deficiencies in the property.”

‘Gone Nuts’

Just as Toronto’s surging prices have stretched to other parts of Ontario, so has the decline in inspections. The city of Barrie, about 105 kilometres north of Toronto, has “gone nuts” in the last three months, said Peggy Hill, a local broker with Keller Williams Experience Realty. Hill said she now sees offers with no conditions about 80 per cent to 90 per cent of the time, compared with 10 per cent to 20 per cent previously. Like his counterparts to the south, Derrick Vogel, owner of EnerOne Inc., an inspection service in Barrie, said his business is down too – by about 45 per cent this year.

Nicholas L’Ecuyer, a managing partner at Barrie-based loan brokerage Mortgage Wellness Group, said he doesn’t view skipping inspections as a red flag for the market, but rather as a necessary evil for buyers seeking to win bidding wars.

“For about four hundred dollars, everybody wants to do it,” he said. “But they know they can’t.”